Tuesday, February 8, 2011

The DOOM that came to the United States.

We have the worlds largest and most influential economy of any country. We have a crushing deficit of 1.5 trillion dollars. We have gross debt, of 14 trillion dollars, about the GDP for the whole of the US for a year.

So much debt, and so much deficit: Meaning that the spending habits of those in government must continually be financed by investors and foreign entities like the Chinese. How much can we borrow before our creditors start to question our ability to make good on these bonds? Many of our lenders keep their own counsel and are quite conservative; others rely upon professionals to objectively rate the risk of non-payment. Whichever happens to be the case, it is becomming abundantly clear, the US' credit card is quickly approaching the point where it is maxed out.

What happens then? When the Government can no longer borrow? Well financially governments deal with this different ways. One way is to "print money" to pay for Government. This is accomplished by having the central bank buy the bonds. This balloons the money supply and causes inflation. The other way allow bonds to be auctioned for lower prices in order to encourage their sale, this increases the yield, meaning simply, the interest on our debt goes up. How much interest are we paying right now? Right now the vig on our debt is on track to be 500 billion dollars for FY 11. The increased interest on US public debt, and its consumption of the available loanable funds puts pressure on loaning, causing all interest rates to rise.

So what is the result of all of this? A crushing economic condition where inflation and rising interest rates feed off of each other, exacerbating each other. The rising interest rates make selling bonds unaffordable, government then issuing currency to operate and avoid default causes inflation, inflation adds expected returns on all forms of investment to rise, causing interest rates to climb even higher. (It's hard to believe that just 10 years ago gold wasn't worth $300 an ounce) In the end, investment in the economy is choked, and a strong growing economy will have a whopper of a recession and suffer stagflation, stifling growth for a decade or more. If that sounds familiar it should, that was the 70's, with interest on home loan north of 20%. If this irresponsible monetary and fiscal policy happens to a weak economy, suffering from a recent financial crisis, high unemployment, and economic contraction, well history has only served us one example, some of my family can remember it; How the government promised it could borrow, spend, and tax its way out of an economic downturn. That decade of suffering is burned into the memory of any who suffered through it and its images haunt us to this day.

As we are the largest economy in the world, the pillar that supports the structure, our collapse into severe contraction like that of the 30's would be an ill omen for a world that depends on us economically. The seeds of instability, strife, tyranny, and war would be scattered far and wide as our utter collapse brought down the most power economies in the world and suffering and want spread across the world like a pandemic.

The Citizens of this great country saw the impending DOOM, and used perhaps their last chance to avert it. They voted resoundingly for fiscal sanity and austerity. They voted for a smaller government, less spending, less deficit, and hopefully lower debt. This is still seen in the polls of those in opposition to raising the federal debt limit.

Our President responded with a budget that included cuts to the attune of 750 million dollars. . . into a 1.5 trillion dollar deficit. For those suffering from big number syndrome. Say my family makes $100,000 a year, but we have a spending problem. We are $700,000 dollars in debt and going $60,000 dollars more in debt every year. So we deftly cut our annual spending by .....
Wait for it....
$37.50
That's right we made the supreme sacrifice and cut out one cheap dinner, for the whole year.

It's time to get serious about our fiscal situation folks. We need to cut until it really hurts, then double the cuts. The 500 billion in the Rand Paul plan is a good starting point to make further, more difficult cuts.

The question is no longer "what kind of debt we are giving to our grand kids?" it is now "Will there be anything left to give to them at all?"

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